Executive Summary

The University of Montana (UM) has traditionally had ready
access to the capital markets and affordable municipal bond insurance because
of its status as the flagship public university in the State of Montana, its
large and stable enrollment, its diverse revenues and balanced operating
performance, and its ample coverage of debt service by pledged revenues. The
University currently has no public credit rating based on its stand-alone
credit quality. In the past, however, Standard and Poor’s (S&P) has
assigned the University a rating of A.

D.A. Davidson has undertaken a debt capacity and credit
study of the University of Montana using ratio analysis and our awareness of
current market conditions for tax-exempt higher education financings. Our goal
has been to identify UM’s credit strengths and weaknesses, and to look at some
comparative benchmarks. In an effort to assess debt capacity, we have also done
some pro forma ratio analysis with various amounts of additional debt. We have
also undertaken a refunding analysis to identify the potential costs and
benefits of refunding the University’s outstanding Series A 1993 Bonds.

As a
result of our analysis, we believe the University would most likely garner a
rating of A2 by Moody’s or A by S&P based on its strong credit
fundamentals. While we expect to recommend the use of Aaa/AAA-rated bond
insurance, it is the prerogative of the University to request an underlying
rating analysis from the bond rating agencies at no additional cost beyond
costs associated with bond insurance. It is also the University’s choice
whether or not to make any credit rating results public, or simply to use them
to enhance negotiations with bond insurers and obtain insurance commitments at
the most reasonable price possible.

Secondly,
we believe the University could reasonably incur additional debt of about $20
million without causing a rating distinction or hindering access to bond
insurance at reasonable rates. We note, however, that the
University’s debt capacity could be enhanced by the strategic importance of any
debt-financed project to the overall capital plan, any potential for
incremental pledged revenue from the project, and any positive trends among
other qualitative credit factors.

Finally,
we also believe it would be to the University’s advantage to advance refund the
Series A 1993 bonds in order to achieve a present value savings of about $1.5
million. For the purposes of this credit and debt capacity analysis,
we have assumed the current debt structure remains in place. It is highly
probable that any refinancing or restructuring activity will augment your
credit position and remaining debt capacity.